Rabbi Raziel Shevach, aged 35, died of his injuries at hospital, after receiving initial treatment by medics at the scene of the attack.
The father of six was shot at in his car while driving past the Havat Gilad Junction, the army said. Medics said he suffered a gunshot wound to his upper body, and his condition deteriorated as he was taken to hospital.
Immediately following the attack, Israeli troops launched a manhunt to locate the terrorists.
Rabbi Shevach was a resident of the nearby Havat Gilad outpost in the West Bank. There are calls for the government to give legal standing to the settler community near Nablus, which Israeli authorities have dismantled several times.